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Freeport Beats Estimates, Profit Down

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Freeport-McMoRan Copper & Gold Inc. (FCX - Analyst Report) reported earnings of 79 cents per share for third-quarter 2013, a decline of 8.1% from the year ago earnings of 86 cents. Profit fell 0.4% year over year to $821 million, impacted by lower price.

The results include net charges of 9 cents per share related to unrealized losses on oil and gas derivative contracts. Barring that impact, earnings was 88 cents a share, beating the Zacks Consensus Estimate of 62 cents.

Revenues surged roughly 40% year over year to $6.17 billion in the third quarter, also beating the Zacks Consensus Estimate of $5.71 billion. Sales were partly boosted by the company’s acquisition of oil and gas business.

Consolidated sales from mines increased to 1.04 billion pounds of copper from 922 million pounds in the year ago quarter due to increased sales throughout Freeport's global mining operations. Sales of gold jumped 50.9% to 305,000 ounces from the prior-year quarter on expected higher ore grades in Indonesia.

Sales of molybdenum increased to 23 million pounds in the reported quarter from 21 million pounds in the third quarter of 2012.

Operational Update

Consolidated average unit net cash costs (net of by-product credits) decreased to $1.46 per pound of copper in the quarter from $1.62 per pound a year ago, mainly attributed to higher copper and gold volumes in Indonesia, and the company’s cost control measures.

Average realized price per ounce for gold fell to $1,329 from $1,728 a year ago while average realized price per pound for copper declined to $3.28 from $3.64 in the prior-year quarter.

Mining Update

North America Copper Mines: Copper sales at the mine increased 9.7% year over year to 363 million pounds and production rose 5% to 354 million pounds in the reported quarter. Freeport expects copper production to continue to improve in 2014 once the Morenci mill expansion project is complete.

South America Mining: Copper sales of 323 million pounds rose 4.9% from the year ago quarter mainly due to increased production at Candelaria. Gold sales surged 23.8% to 26,000 ounces. Copper production rose 11.6% to 347 million pounds in the reported quarter and gold production jumped 50% to 30,000 ounces in the quarter.

Indonesia Mining: Copper sales of 237 million pounds increased 21.5% from the year ago quarter while production jumped 27.1% to 253 million pounds. Gold sales soared 56.2% to 278,000 ounces due to higher ore grades and increased mill rates and production shot up 63.2% to 297,000 ounces.

The mine experienced improved ore grade in the quarter compared with the previous quarters and thus sales from Indonesia mining are expected to increase in 2014 through 2016 as the mine gains access to higher grade ore.

Freeport, this month, reached a tentative deal with the workers of the Grasberg mine in Papua, Indonesia, over wages for the period 2013-2015. The terms of the deal will be included in its bi-annual Collective Labor Agreement (CLA). Freeport and the union have agreed on some terms to be included in the CLA including base pay hike for the workers and enhancements in the pension plan and other benefits.

Africa Mining: Copper sales of 118 million pounds represent a year over year increase of 34.1%, reflecting higher mining and milling rates and higher ore grades. Production increased 19.8% to 109 million pounds in the quarter. During the quarter, the mine faced several power interruptions, which impacted operating rates. Freeport is currently working with the power provider and DRC authorities to address the problem.

Molybdenum: Molybdenum production of 12 million pounds in the third quarter was higher than third-quarter 2012 production of 10 million pounds. Weak demand and high supply in the metallurgical sector led to the decline in market conditions for molybdenum and Freeport will make requisite adjustments to its primary molybdenum production after reviewing the market conditions.

Financial Position

Freeport had cash and cash equivalents of $2.2 billion as of Sep 30, 2013, compared with $3.7 billion as of Sep 30, 2012.

Freeport had long-term debt of $21.1 billion (includes $10.5 billion of acquisition related debt, $7.1 billion assumed debt of Plains Exploration & Production Company and McMoRan Exploration and $3.5 billion of its existing debt) as of Sep 30, 2013, compared with debt of $3.5 billion as of Sep 30, 2012.

Freeport’s operating cash flows were $1.9 billion in the third quarter of 2013. Capital expenditures totaled $1.6 billion in the reported quarter which includes $0.7 billion for oil and gas operations.

Upon closing of the Plains Exploration and McMoRan Exploration acquisition, Freeport replaced its revolving credit facility that was slated to expire in Mar 2016 with a new $3 billion senior unsecured revolving credit facility, which is available through May 2018.

Oil and gas Operations (FMO&G)

In May and early June, Freeport completed the acquisitions of Plains and McMoRan Exploration and formed a premier U.S. based natural resource company collectively called FM O&G, and added a high quality portfolio of U.S.-based oil and gas assets to its global mining business. Freeport’s third-quarter 2013 financial results include FMO&G operations beginning Jun 1, 2013.

Cash production costs for oil and gas operations were $16.80 per barrels of oil equivalents (BOE) in the third quarter of 2013. Capital expenditures for FM O&G totaled $0.9 billion for the four-month period from Jun 1, 2013 to Sep 30, 2013.

Guidance

For 2013, Freeport expects consolidated sales from mines of 4.1 billion pounds of copper, 1.1 million ounces of gold, 92 million pounds of molybdenum and 37.5 MMBOE (for the period from Jun 1, 2013, to Dec 31, 2013). For the fourth quarter, consolidated sales are estimated at 1.1 billion pounds of copper, 390,000 ounces of gold, 21 million pounds of molybdenum and 16 MMBOE.

Consolidated unit net cash costs (net of by-product credits) for Freeport’s copper mining operations are forecast to be roughly $1.58 per pound of copper for 2013. Unit net cash costs are expected to decline in 2014 as Freeport will gain access to higher grade ore in Indonesia. Cash production costs per BOE are expected to be roughly $17 per BOE for the period from Jun 1, 2013, to Dec 31, 2013.

Based on current sales volume and cost estimates Freeport’s consolidated operating cash flows are estimated to be roughly $6 billion for 2013. Capital expenditures are anticipated to be about $5.5 billion for 2013, including $2.4 billion for major projects at mining operations and $1.5 billion for oil and gas operations (for the period beginning Jun 1, 2013, to Dec 31, 2013).

Our Take

Freeport’s strategy is to reduce debt and maintain a strong balance sheet, while investing in financially attractive projects and providing cash returns to shareholders. The company is working in sync with its plans and is also conducting explorations close to its existing mines with a goal to boost reserves which will facilitate the development of additional future production capacity across the large minerals districts where it operates.

Moreover, the acquisitions of Plains and McMoRan Exploration have ushered in new opportunities. However, higher production cost is a concern for Freeport.

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